Employee vs Contractor….Determining Who’s Who!

Over the years, I have often been asked to help a client determine the employment status of an employee.  This blog post will provide some details for you to consider when hiring staff.

In Canada, the distinction between an employee and a contractor is important for legal, tax, and benefits purposes. Here’s an overview of the key differences:

1. Employment Status

• Employee: An employee works for an employer under a contract of employment. The employer provides direction and control over the work, and the employee is typically subject to the employer’s policies and procedures.

• Contractor: A contractor, or independent contractor, works on a contract basis, often with more freedom in terms of how and when they do their work. Contractors typically have their own businesses, and they usually work for multiple clients.

  
  

2. Control and Independence

• Employee: The employer generally has significant control over the work. The employer decides what work needs to be done, how it will be done, and when it should be completed.

• Contractor: Contractors generally have more control over how and when they complete their work. They are typically hired for their expertise and can manage their schedules and methods of delivery.

  
  

3. Payment and Benefits

• Employee: Employees receive regular wages or a salary and are entitled to benefits such as vacation pay, sick leave, and sometimes health insurance, pension contributions, or other employer-sponsored perks.

• Contractor: Contractors are usually paid on a per-project basis, hourly, or with a fixed contract amount. They are not entitled to employee benefits, and they must handle their own taxes, insurance, and retirement plans.

  
  

4. Taxation

• Employee: Employees have income tax, Canada Pension Plan (CPP), and Employment Insurance (EI) premiums automatically deducted from their pay by the employer. The employer also contributes to EI and CPP on the employee’s behalf.

• Contractor: Contractors are responsible for their own taxes, including paying both the employer and employee portions of CPP. They also do not have EI benefits unless they specifically enroll for the sole proprietor coverage.

  
  

5. Termination and Job Security

• Employee: Employees generally have more job security. If an employer terminates an employee without cause, the employee may be entitled to severance or notice of termination depending on the circumstances and the employment contract.

• Contractor: Contractors typically have less job security. The contract may specify the terms of termination, and once the project or contract is completed, the contractor has no obligation to continue working for the client.

  
  

6. Risk and Liability

• Employee: Employees do not typically take on business risk, as they are working under the direction of an employer. The employer bears the risk for business operations and is liable for workplace injuries, unless the employee is negligent.

• Contractor: Contractors bear more risk, as they are essentially running their own business. They are responsible for their own work, equipment, and insurance, and they may face legal or financial consequences if something goes wrong with the project.

  
  

7. Integration with the Employer’s Business

• Employee: Employees are often integrated into the employer’s business. They work regularly, and their work is a key part of the business operations.

• Contractor: Contractors are typically external to the business. Their work is more project-specific, and they may not be fully integrated into the company’s day-to-day operations.

  
  

The Canada Revenue Agency (CRA) has guidelines to help distinguish between employees and contractors, and misclassification can lead to penalties. A few factors they consider include the level of control, the ownership of tools, the financial risk, and the ability to hire other people.

If you're uncertain whether someone should be classified as an employee or contractor in a particular situation, it may be helpful to consult with a tax professional or legal advisor to ensure you are compliant with Canadian tax laws.

To discuss further, book a call with me today!